Loan deemed, participant still employed

[BG5150]

I have a participant who took out a loan in 2003. No payments were ever made for whatever reason. So far, not tax forms were issued for it. So I am going to have one issued. What code does it get? P for 2004 (the loan defaulted Jan 1, 2004)? Or is it a 2010 form?

Also, because the person is still employed, the loan is still considered outstanding, correct? And if he decides to pay it back (a big if), would those payments come in as after-tax payments, creating a basis, since he'll already have the tax burden of the money?

[Guest Sieve]

I don't know what 1099 code to use, but I have a problem issuing a 1099 for 2004 at this late date since the statute of limitations probably has passed on the participant's 2004 income tax return & an amended return cannot be filed (unless the deemed amount exceeded 25% of gross income, thus a 6-yr. statute).

If the error was not the fault of the participant, I'd file under VCP. That permits you to request that the 1099 be issued in the year the VCP compliance statement is completed--and, if there's not a party-in-interest involved, then there should be no PT worries. (Be careful of a willful intent for the loan never to be repaid--that's an actual distribution, and may cause qualification issues. (Treas Reg. Section 1.72(p)-1, Q&A-17.))

But, yes, the interest paid on a deemed loan is after-tax and, until the loan is repaid, the interest continues to accrue fior purposes of determining the amount of any subsequent loan. (Treas. Reg. Section 1.72(p)-1, Q&A-19 and Q&A-21.)

[R. Butler]

Can repayments rsume on a loan default if after-tax contributions are not allowed?

[Guest Sieve]

I would say Yes, because the rayments are not employee contributions, but are loan repayments and are credited against the outstanding amount of the loan in order to eliminate the continuing accrual of interest impacting future loans, and because the default results in only a deemed distribution (rather than an actual distribution).